Trade-weighted prices for all products and across all contracts at yesterday’s Global Dairy Trade auction were down 6.7 per cent from the previous event two weeks ago.
The biggest falls were in skim and whole milk powder which fell 7.2 per cent and 6.8 per cent respectively.
The latest pricing drop follows another 2.3 per cent decline at the previous auction, taking prices down to their lowest level since 5 January. Nevertheless, prices are still 17.8 per cent above their level from a year ago.
Fonterra accounts for about 40 per cent of global dairy trade so its fortnightly auctions, selling milk powder, casein and dried milk fat, are seen as a useful guide for gauging the direction of international dairy prices.
Strong New Zealand dollar weakens competitiveness
Nevertheless, the latest falls may have as much to do with the New Zealand dollar as they do with the international dairy market. The IMF recently said the currency is 20 per cent overvalued and this strength is weakening the competitive position of the New Zealand dairy industry in international markets.
Auction prices and the Kiwi dollar had been increasing in tandem, peaking at the beginning of the year as a result of strong demand from China and other Asian countries and bad weather in other countries that put a dampener on global supply growth.
With the New Zealand dollar weakening after the latest auction, prices could start to recover but the market fundamentals are relevant as well.
Substantial drop in Chinese and Russian demand
Rabobank said last week in its quarterly update on the international dairy market that the earlier fears of poor weather in New Zealand had prompted “a frenetic stock build” at the start of the year.
Now that milk production in New Zealand has turned out better than expected, Rabobank said the signs were that import buying from China had “dropped off substantially.”
The bank warned that this could spark price decreases although it said these are likely to be limited as buyers that had been squeezed out because of high prices could be enticed back by even modest price reductions.